Chapter 20

mailboxcuckooΔιαχείριση

10 Νοε 2013 (πριν από 3 χρόνια και 11 μήνες)

70 εμφανίσεις

International Business


8e



By Charles W.L. Hill


Chapter 20

Financial Management
in the International
Business


Copyright © 2011 by the McGraw
-
Hill Companies, Inc. All rights reserved.

McGraw
-
Hill/Irwin



20
-
3

What Is

Financial Management?


Financial management

involves

1.
Investment decisions


what to finance

2.
Financing decisions


how to finance those decisions

3.
Money management decisions


how to manage the firm’s
financial resources most efficiently


Good financial management can create a competitive
advantage


reduces the costs of creating value and adds value by improving
customer service


Decisions are more complex in international business


different currencies, tax regimes, regulations on capital flows,
economic and political risk, etc.




20
-
4

How Do Managers Make
Investment Decisions?


Financial managers must quantify the benefits,
costs, and risks associated with an investment in a
foreign country


To do this, managers use
capital budgeting



involves estimating the cash flows associated with the
project over time, and then discounting them to
determine their net present value


If the net present value of the discounted cash
flows is greater than zero, the firm should go
ahead with the project






20
-
5

Why Is Capital Budgeting More
Difficult For International Firms?


Capital budgeting is more complicated in
international business


because a distinction must be made between
cash flows to the project and cash flows to the
parent company


because of political and economic risk


because the connection between cash flows to
the parent and the source of financing must be
recognized





20
-
6

What Is The Difference Between
Project And Parent Cash Flows?


Cash flows to the project and cash flows to the
parent company can be quite different


Parent companies are interested in the cash flows
they will receive, not the cash flows the project
generates


received cash flows are the basis for dividends, other
investments, repayment of debt, and so on


Cash flows to the parent may be lower because of
host country limits on the repatriation of profits,
host country local reinvestment requirements, etc.



20
-
7

How Does Political Risk

Influence Investment Decisions?


Political risk

-

the likelihood that political forces
will cause drastic changes in a country’s business
environment that hurt the profit and other goals of
a business


higher in countries with social unrest or disorder, or
where the nature of the society increases the chance for
social unrest


Political change can result in the expropriation of
a firm’s assets, or complete economic collapse that
renders a firm’s assets worthless




20
-
8

How Does Economic Risk

Influence Investment Decisions?


Economic risk

-

the likelihood that
economic mismanagement will cause
drastic changes in a country’s business
environment that hurt the profit and other
goals of a business


The biggest economic risk is inflation


reflected in falling currency values and lower
project cash flows




20
-
9

How Can Firms Adjust For
Political And Economic Risk?


Firms analyzing foreign investment
opportunities can adjust for risk

1.
By raising the discount rate in countries
where political and economic risk is high

2.
By lowering future cash flow estimates to
account for adverse political or economic
changes that could occur in the future



20
-
10

How Do Firms Make

Financing Decisions?


Firms must consider two factors

1.
How the foreign investment will be financed


the cost of capital is usually lowest in the global capital market


but, some governments require local debt or equity financing


firms that anticipate a depreciation of the local currency, may
prefer local debt financing

2.
How the financial structure (debt vs. equity) of the
foreign affiliate should be configured


need to decide whether to adopt local capital structure norms or
maintain the structure used in the home country


Most experts suggest that firms adopt the structure that
minimizes the cost of capital, whatever that may be




20
-
11

What Is Global

Money Management?


Money management

decisions attempt to
manage global cash resources efficiently


Firms need to

1.
Minimize cash balances

-

need cash balances
on hand for notes payable and unexpected
demands


cash reserves are usually invested in money market
accounts that offer low rates of interest


when firms invest in money market accounts they
have unlimited liquidity, but low interest rates


when they invest in long
-
term instruments they have
higher interest rates, but low liquidity





20
-
12

What Is Global

Money Management?

2.
Reduce

transaction costs

-

the cost of exchange


every time a firm changes cash from one currency to
another, they face
transaction costs


Most banks also charge a
transfer fee

for
moving cash from one location to another


Multilateral netting can reduce the number of
transactions between subsidiaries and the
number of transaction costs



20
-
13

How Can Firms Limit

Their Tax Liability?


Every country has its own tax policies


most countries feel they have the right to tax
the foreign
-
earned income of companies based
in the country


Double taxation

occurs when the income
of a foreign subsidiary is taxed by the host
-
country government and by the home
-
country government



20
-
14

How Can Firms Limit

Their Tax Liability?


Taxes can be minimized through

1.
Tax credits

-

allow the firm to reduce the taxes paid to
the home government by the amount of taxes paid to
the foreign government

2.
Tax treaties

-

agreement specifying what items of
income will be taxed by the authorities of the country
where the income is earned

3.
Deferral principle

-

specifies that parent companies
are not taxed on foreign source income until they
actually receive a dividend

4.
Tax havens

-

countries with a very low, or no, income
tax


firms can avoid income taxes by establishing a
wholly
-
owned, non
-
operating subsidiary in the country



20
-
15

How Do Corporate

Tax Rates Compare?

Corporate Income Tax Rates, 2006




20
-
16

How Do Firms Move

Money Across Borders?


Firms can transfer liquid funds across
border via

1.
Dividend remittances

2.
Royalty payments and fees

3.
Transfer prices

4.
Fronting loans


Firms that use more than one of these
techniques are
unbundling




20
-
17

What Are

Dividend Remittances?


Paying dividends is the most common method of
transferring funds from subsidiaries to the parent


The relative attractiveness of paying dividends
varies according to


tax regulations


high tax rates make this less attractive


foreign exchange risk


dividends might speed up in
risky countries


the age of the subsidiary


older subsidiaries remit a
higher proportion of their earning in dividends


the extent of local equity participation


local owners’
demands for dividends come into play



20
-
18

What Are

Royalty Payments And Fees?


Royalties

-

the remuneration paid to the owners of
technology, patents, or trade names for the use of that
technology or the right to manufacture and/or sell
products under those patents or trade names


can be levied as a fixed amount per unit or as a percentage of gross
revenues


most parent companies charge subsidiaries royalties for the
technology, patents or trade names transferred to them


A
fee

is compensation for professional services or
expertise supplied to a foreign subsidiary by the parent
company or another subsidiary


royalties and fees are often tax
-
deductible locally




20
-
19

What Are Transfer Prices?


Transfer prices

-

the price at which goods and
services are transferred between entities within
the firm


Transfer prices can be manipulated to

1.
Reduce tax liabilities by shifting earnings from high
-
tax
countries to low
-
tax countries

2.
Move funds out of a country where a significant
currency devaluation is expected

3.
Move funds from a subsidiary to the parent when
dividends are restricted by the host government

4.
Reduce import duties when ad valorem tariffs are in
effect



20
-
20

What Makes

Transfer Prices Unattractive?


But, using transfer pricing can be
problematic because

1.
Governments think they are being cheated out
of legitimate income

2.
Governments believe firms are breaking the
spirit of the law when transfer prices are used
to circumvent restrictions of capital flows

3.
It complicates management incentives and
performance evaluation



20
-
21

What Are Fronting Loans?



Fronting loans

are loans between a parent
and its subsidiary channeled through a
financial intermediary, usually a large
international bank


Firms use fronting loans


to circumvent host
-
country restrictions on the
remittance of funds from a foreign subsidiary to
the parent company


to gain tax advantages




20
-
22

What Are Fronting Loans?

An Example of the Tax Aspects of a Fronting Loan




20
-
23

How Do Firms Manage

Global Cash Resources?


Firms manage their global cash resources using

1.
Centralized depositories


Holding cash balances at a centralized depository is
attractive because


by pooling cash reserves centrally, firms can deposit larger
amounts, and therefore earn higher rates of interest


when centralized depositories are located in major financial
centers, the firm has access to a greater variety of investment
opportunities than a subsidiary would have


by pooling cash reserves, firms can reduce the total size of the
readily accessible cash pool, and invest larger amounts in longer
-
term, less liquid accounts that have higher interest rates



20
-
24

How Do Firms Manage

Global Cash Resources?


But, centralized depositories can be unattractive
because of


government restrictions on cross
-
border capital flows


the transaction costs involved in moving money in
and out


The use of centralized depositories is expected
to increase because of the globalization of capital
markets and the removal of barriers to the free
flow of capital across borders




20
-
25

How Do Firms Manage

Global Cash Resources?

2.
Multilateral netting

-

can reduce the
transaction costs associated with many
transactions between subsidiaries


an extension of
bilateral netting


if a French subsidiary owes a Mexican subsidiary $6 million,
and the Mexican subsidiary simultaneously owes the French
subsidiary $4 million, a bilateral settlement will be made with
a single payment of $2 million


Under
multilateral netting
, the concept is
extended to multiple subsidiaries within an
international business



20
-
26

What Is Multilateral Netting?

Cash Flows Before Multilateral Netting




20
-
27

What Is Multilateral Netting?

Calculation of Net Receipts (millions)





20
-
28

What Is Multilateral Netting?

Cash Flows After Multilateral Netting





20
-
29

Review Question

Which of the following is
not
one of the

decision areas in financial management?


a) cash operations decisions

b) investment decisions

c) financing decisions

d) money management decisions



20
-
30

Review Question

The fee for moving cash from one location to

another is called


a) the money management fee

b) the transaction cost

c) the transfer fee

d) the cost of capital




20
-
31

Review Question

Compared to the other countries, corporate

income tax rates in ________ are relatively low.


a) Canada

b) Ireland

c) Germany

d) Japan





20
-
32

Review Question

A __________ specifies that parent companies

are not taxed on foreign source income until

they actually receive a dividend.


a) tax credit

b) deferral principle

c) tax haven

d) tax treaty





20
-
33

Review Question

Firms can transfer liquid funds across borders

using all of the following techniques
except


a) dividend remittances

b) royalty payments and fees

c) transfer prices

d) backing loans




20
-
34

Review Question

The most common method of transferring

funds from subsidiaries to the parent is

through


a) dividend remittances

b) royalty payments and fees

c) transfer prices

d) backing loans